St. Charles – Geneva – South Elgin – Elgin

New Home Buyers: Risks and Benefits of Rent To Own

Planning ahead on your home ownership dream?

If you are ready to kick your home search into full gear, consider an option like a rent to own. Less than perfect credit scores and loads of flexibility are two pluses when buying a home as a lease to own.

A rent to own option works like this: a buyer is given the “option” to purchase the home at some point in the future at a specified price. A traditional sale brings the buyer and seller together to complete the purchase quickly, after agreeing to terms.

Instead, with a rent to own transaction, the final purchase is delayed. The buyer and the seller agree to the possibility of the sale at a future date and it may or may not occur. The buyer or seller can back out of the agreement, by simply not accepting the sale when the agreement is ended. In the meantime, the renter decides if they want to make the purchase, often paying additional funds to the seller, to decrease the amount of money needed toward purchase price.

Benefits for Buyers:

Renters can buy even with bad credit: Often dinged on credit scores, renters may not qualify for a traditional conventional home mortgage. But they may be able to repair their credit with a solid report of their regular monthly payments over the long term.

Lock in a purchase price: Renters can agree with the sellers as much as 12 months 9 or more) ahead on the purchase price. They can put extra dollars toward the purchase of the home, setting up a discount for when they finally do close.

Take it for a Test Drive: Try it before you buy it! Renters may fall in love with the home even more while under the option. Or they may decide the property isn’t the home of their dreams and decide to skip it at the end of the agreement.

Risks for Buyers:

Forfeiting money: If for some reason, you don’t buy the home, you lose all of the extra money you paid.

Slow progress: If you plan on getting that raise or improving your credit score, and it doesn’t quite work out, you may be unable to commit to the sale when the agreement ends.

Less control: This is a tricky part because while you inhabit the property, you don’t have control over it (yet). For example, your landlord could skip making mortgage payments, not pay the taxes or wind up with a contractor’s lein. These are outside of your control. Be sure to have it in your agreement to address these scenarios, including the landlord cannot sell to another buyer while under the option to you.

Falling prices: This is not a consideration for the current home market, but it was a few years ago. If home prices fall during your contract, you may be unable to renegotiate the purchase price. Then you are left with the option of forfeiting all your option money or buying the house at a higher than market value price. If your lender won’t approve an oversized loan, you’ll need to bring extra money out of your own savings to the closing table to cover the difference.

Late payments hurt: Just like a traditional mortgage, missing monthly payments can penalize you. Your lease to own agreement may include a qualifier clause that you must make all payments on time, you may lose the right to purchase (and lose your extra payments). In some cases, you keep your option, but your extra payment for the month is not “counted” towards the eventual purchase.

Home Issues: There might be problems with the property that you don’t now about until you try to buy it (as noted with tax liens, deferred maintenance and title problems). It’s best to treat a rent to own property like a “real” purchase and get the reassurance of a full home inspection and title search.

Scams: Protect yourself and the sellers by hiring a reputable attorney to review the sales contract and go over all the requirements to successfully purchase he home. A home purchase is a major investment, so be sure to do your due diligence. If it sounds too good to be true, it probably is.

Contracts:

If you’re interested in finding out more about rent-to-own a home contracts, check out a sample agreement for your state that protects both the home owner and the tenant.

There are many sample rent-to-own agreements and templates online that you can customize and use. Before using a template however, you should review laws in your state and common items included in a contract to ensure you covering all bases prior to signing a contract.

I always suggest that you consult with an attorney prior to signing any lease-to-own contract or drafting a contract for your home. It’s a big investment, and you’ll want the peace of mind that comes with a well prepared contract to help protect yourself.

Did you know?

In addition to helping owners with distressed homes and foreclosures, Fox Valley Homes offers full broker service for regular listings, rentals, buyers and home sellers, as well as investors in residential properties across the northern Illinois and Chicago region. We coordinate real estate transactions effectively and retain the full skills and expertise of fully licensed Realtors®, including access to the resources of the local Illinois MLS database.